President Javier Milei has presented a draft 2025 budget promising spending cuts and a small surplus
On September 15, President Javier Milei presented his first draft budget for 2025. The draft reaffirms the ‘zero deficit’ that remains the cornerstone of government economic policy, and a small surplus is forecast for 2025. Though some expenditure items, such as social security and capital spending, will rise somewhat after this year’s severe cuts, energy subsidies will be slashed, undermining government expectations of a sharp fall in inflation.
What next
Subsidiary Impacts
- While public opinion has thus far supported fiscal discipline, all recent polls show that Milei’s support is falling amid economic concerns.
- Exchange rate forecasts for 2025 suggest that the government will not lift capital controls in the short term.
- If Congress does not pass the budget, the government would extend the current budget, leaving more room for discretionary spending.
Analysis
In his speech to Congress, Milei announced a new ‘fiscal rule’ for the federal budget: the government will guarantee a financial surplus (after interest payments) or at least a ‘zero deficit’:
- The government will first estimate annual interest payments in order to determine the resources needed to reach a financial surplus or zero deficit.
- Thereafter, it will compute inflation-adjusted spending items, such as pensions, and then determine financing for discretionary spending bills according to public policy priorities.
- If revenues prove lower than expected, the government will cut discretionary bills. If they are higher than expected, the government will implement tax cuts.
Macroeconomic estimates
The budget bill includes the government’s macroeconomic estimates for 2024-27.
GDP growth
After contracting by 1.6% in 2023, GDP is expected to fall by 3.8% in 2024 (following a first-half contraction of 3.4%) before expanding by 5% in 2025. For 2026 and 2027, the government expects real GDP growth of 5% and 5.5%. Growth next year would be driven by investment (up 9.9%), exports (7.7%), private consumption (4.5%) and public consumption (4%). After falling by 19.2% in 2024, imports will rise by 14.2% next year.
The government expects the main driver of the rebound to be investment projects triggered by the Incentives for Large Investments Regime (RIGI), part of the ‘base law’ passed in June. The RIGI included benefits for major investments in key industries such as energy, mining and infrastructure (see ARGENTINA: Policies raise more questions than answers – July 15, 2024). Manufacturing and retail are also expected to recover after their sharp contraction in 2024.
New investment incentives will not offset doubts over capital controls
Growth of 5% would mean a rebound after the downturn of 2023-24. Still, there are doubts over its sustainability (or even achievability) given the government’s apparent unwillingness to lift capital controls before the mid-term elections: the draft budget does not refer to lifting them. While RIGI includes some loosening of foreign exchange controls, there is broad consensus that there will be no major foreign investments until capital controls are lifted.
Speaking at the New York Stock Exchange yesterday, Milei said controls would not be lifted until inflation reaches zero, prompting a fall in Argentine asset prices.
Foreign trade
The trade surplus will reach USD20.7bn, down 5.5% year-on-year due to a 13.4% rise in imports and an increase of only 9.0% in exports. However, export earnings will largely depend on global agricultural prices and a moderate “La Nina” weather event. At the same time, imports could be above expectations due to the lifting of the PAIS tax levied on imports and other foreign exchange operations next year.
Inflation and exchange rates
However, the most controversial estimates relate to inflation and exchange rates:
- Year-end inflation is expected to reach 104.4% in 2024 and descend dramatically to 18.3% in 2025.
- The official exchange rate is expected to reach ARS1,019.9:USD1 at the end of 2024 and ARS1,207:USD1 one year later.
The 2024 inflation estimate looks highly optimistic, as it would require the monthly rate to fall from the current 4% to just 1.2% in the last months of the year. For 2025, the monthly rate should be 1.4%, unlikely given the expected rise in utilities tariffs, recovering consumption and the mid-term elections, which usually increase exchange rate volatility and boost public spending.
With foreign debt repayments of USD24bn next year and the impact of elections, exchange rate estimates look over-optimistic (see ARGENTINA: Policy problems will raise banking risks – August 30, 2024).
Fiscal forecasts
The national administration is expected to post a primary surplus of ARS7.7tn (USD8bn), equal to 1.3% of GDP in 2025, slightly below 1.5% this year, and a financial surplus (after interest payments) of 0.3%, down from 0.5% this year. Total government resources are expected to increase by 34.8%, with tax revenues rising by 29.4%, and social security contributions by 47.6%. Tax revenue estimates for 2025 included the elimination of the PAIS tax (1.1% of GDP in 2024), which must be compensated elsewhere.
The main drivers of revenue growth will be export, income, fuel and import taxes, and taxes on the self-employed. By contrast, wealth tax revenues are expected to fall due to the rise of the tax-free threshold, reduced rates on foreign assets, and the chance to prepay the tax for the 2023-27 period at a lower cost.
Primary spending is expected to rise by 34.9% to 23.9% of GDP (up from 18.3% in 2023). Growth will be driven by consumption spending (up 44.5%), social security (39.3%) and capital expenditure (36.1%), after the latter two suffered deep cuts this year. Pensions, still below December 2023 levels in real terms, will be adjusted in line with inflation (see ARGENTINA: Early economic successes are unsustainable – March 18, 2024).
Despite the expected rise in capital spending, industry representatives warn that this will not offset the deterioration of infrastructure after this year’s sharp fall in public works spending.
After falling by 37.5% in real terms from January to July 2024, energy subsidies will fall by another 41.3% in 2025, representing only 0.5% of GDP, the lowest level since 2007. This implies that energy tariffs will continue rising, boosting inflation.
Provincial pressures
During his speech, Milei announced that provinces must cut their budgets by some USD60bn to take total national expenditure to 25% of GDP. This figure represents almost 100% of provincial budgets; the Economy Ministry was forced to contradict the statement and put the figure at around USD20bn. However, there is little room for provincial cuts. After this year’s sharp fiscal adjustment, they have received less federal funding and have also had to take over spending areas such as infrastructure previously financed with federal resources.
Popular and congressional pushback on some spending cuts will mount
Tensions between provincial governors and the Milei administration will condition congressional budget discussions beginning in early October. However, legislators will also push back on the expected rise of tax expenditures (including tax benefits for several industries), cuts to the wealth tax, and sensitive expenditure items such as pensions, education and health.
Tax expenditures (measures to reduce or defer taxes for some contributors) represented 4.0% of GDP in 2023, falling to 3.48% in 2024. For 2025, the government plans to increase this to 3.54% of GDP, a rise that has been criticised by many lawmakers who argue some industries that receive these benefits, such as the IT sector or the manufacturing industry in Tierra del Fuego province (see LATIN AMERICA: Frictions may rise in Tierra del Fuego – June 25, 2024), are already profitable and do not need them.
